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Clean Air Compliance Won’t Break the Bank for Energy Users

As the grid moves to cleaner energy sources, efficiency will continue to be the most compelling option for consumers looking to save on energy costs.

by Dan Bakal, Director, Electric Power Program
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CeresPosted on Jun 13, 2012

Last month, the nation’s largest electricity market announced that it would have more than enough capacity to keep the lights on for some 60 million people in 2015. Every energy user from the Mid-Atlantic coast to Chicago, Illinois should be pleased with that news.

For those who support a cleaner, more cost-effective electric power grid, there were even more reasons for optimism.

PJM Interconnection, the nation’s largest regional grid operator, holds annual auctions to ensure that consumers have sufficient power at a reasonable price. The auctions occur three years before that power is actually delivered, so this year’s auction set prices for the 2015/2016 delivery year.

2015 also happens to be the same year that the EPA’s Mercury and Air Toxics Standards (MATS) go into effect. These new regulations aim to reduce emissions of mercury and other toxic pollutants from power plants. Many of the nation’s coal-fired power plants reside in PJM’s service territory, so the market was anxious to see how power producers would respond.

It’s safe to say that the results far exceeded their expectations.

Not only did the auction yield lower than expected pricing, it also delivered a cleaner mix of power generation assets, record-setting participation from energy efficiency projects and proof that EPA compliance is well within reach for the region’s power providers.

So – let’s start with the big question - what’s the cost to consumers? This year’s auction set capacity prices in PJM at $136 per megawatt. A small region of northern Ohio did see somewhat higher prices due to transmission constraints. Though it requires a bit of a lesson on electric power markets to explain exactly what this will mean for energy consumers come 2015, these prices were far below analyst expectations of $150 - $190 per megawatt. That’s great news for consumers.

Even so, some EPA opponents argue that the new MATS regulations will dramatically increase the cost of electricity. That assertion doesn’t pass muster. As PJM officials explained when announcing the auction results, “Capacity is a fairly small component of the retail price of electricity, and the cost of capacity at the retail level tends to be averaged out over several years.” In the first quarter of 2012 for example, capacity represented only 16.5 percent of the total price per megawatt-hour of electricity. That was down from 19.2 percent in the prior year (Table 1-7).

Further, a study from the Analysis Group indicates that it’s likely PJM’s wholesale energy prices would drop by more than 10 percent in 2015 compared to 2011 levels, even after accounting for inflation. Since energy prices represent the lion’s share of electricity bills, this trend would help to offset any increase in capacity prices for consumers. Lower energy prices are also driven largely by the shift to a lower cost and lower carbon fuel source: natural gas.

The growth of gas-fired electricity generation was certainly the second big story in this year’s auction, and coal-fired generators are taking note. “The math screams at you to do gas,” Michael G. Morris, chairman of American Electric Power, the nation’s largest consumer of coal, told the New York Times recently. The nation’s second largest power producer, Southern Company, recently indicated that its fuel mix has shifted from 70 percent coal in 2007 to 35 percent in 2012 – a tectonic shift for a relatively slow moving industry!

Natural gas-fired plants emit half the carbon emissions that coal plants do and none of the toxic substances regulated by the MATS standards. Natural gas could help in the transition away from coal-fired generation, but it’s no panacea. Hydraulic fracturing, known as ‘fracking’, has vastly increased gas supplies, causing prices to plummet. But the markets will need to incorporate the external costs of greenhouse gas emissions and waste disposal issues at these new drilling sites, as well as the cumulative impact on water resources. According to a recent Ceres report, “Practicing Risk-Aware Electricity Regulation”, natural gas remains on the higher end of the risk spectrum, despite being ranked among the lowest-cost energy sources.

Fortunately, this year’s auction also included record participation from two of the lowest-risk options, renewables and energy efficiency. Wind power participation rose 15 percent from last year’s levels, and solar increased by 22 percent. Energy efficiency and demand response programs also increased for the second year running. Efficiency is ranked as the lowest-cost, lowest-risk resource option in “Practicing Risk-Aware Electricity Regulation,” and demand response programs actually pay energy users to ramp down usage during peaks and other grid emergencies.

As the grid moves to cleaner energy sources, efficiency will continue to be the most compelling option for consumers looking to save on energy costs. In the meantime, PJM’s auction results are encouraging evidence that the transition to cleaner power won’t impose undue costs on the consumer.

Dan oversees Ceres’ electric power and coal research, shareholder engagement, and furthers the understanding of environmental risks, with a particular focus on climate risk. He works closely with Ceres coalition members, including environmental, investor, labor and public interest groups, to engage in dialogues with electric power companies, which often involve a comprehensive review of environmental policies, performance, and disclosure practices.